Minimising the tax paid on profits is a key aim of most SME businesses. The tax benefits of trading through a limited company, as compared to operating as a sole trader or partnership, soon becomes attractive as profits grow.
As the tax calculations below illustrate, based on the UK tax rates and thresholds for 2016/17 (ie applying the new dividend taxation rules), a limited company still results in a lower overall tax/NIC charge than a sole trader (allowing for the extra accountancy fees incurred through trading as a limited company), whilst profits are above approximately £30k pa:
|– Class 2||–||–||–||–|
|– Class 4||153||3,309||3,809||4,309|
|– Various rates||–||1,910||8,070||14,570|
|Lowest Tax/NIC||Sole Trader||Company||Company||Company|
In the above comparison, in order to minimise tax in the company example, the salary/dividend remuneration mix has to be optimised.
As well as the amount of direct taxation due on profits, businesses should consider a number of further matters before deciding which of the two trading mediums is best advice:
Other tax matters
Use of other family members’ tax allowances and reliefs,
Timing of tax payments,
The profit or loss profile of the business over time,
The more generous company tax deduction rules,
Capitalising goodwill on conversion of existing business,
Future, further unforeseen changes in tax rules.
- Image and credibility in the marketplace,
- Client expectations (particularly for consultancy assignments),
Cost and practical matters
The additional administration work and professional fees as a limited company,
The discipline required in keeping personal finances separate from business finances,
Use of certain words in the business name,
How long into the future that you believe the business will continue to trade.
If you have a work offer, there are various solutions to how you could be engaged:
- Directly employed (on the books)
- Self employed/sole trader consultant
- Limited company contractor (IR35 non applying)
- Limited company contractor (IR35 applying)
- Through an umbrella employment agency
If you require assistance understanding and going through your options, to decide what structure is best advice for your particular unique circumstances, please contact Ian Piper for a free initial consultation. Similarly, if you have already decided and are about to become a start-up business, needing help with registration, annual compliance, etc, please contact us.